Warren Buffett, the 88-year-old investment guru, is used to feeling the love at annual gatherings of investors in his Berkshire Hathaway vehicle
Last Saturday was no exception, as 40,000 people swarmed on his hometown of Omaha for what’s become known as “Woodstock for Capitalists” to hear Buffett and his nonagenarian sidekick, Charlie Munger, serve up bon mots and cautionary tales over five hours.
These ranged from Buffett's regret over not buying shares in Google parent, Alphabet, which has soared 500 per cent in the past decade, to how companies fill boards with "independent" non-executives who rarely upset the apple cart – "You don't get invited to be on boards if you belch too often at the dinner table" – and the importance of not going "overboard" with delayed gratification, the foundation of financial planning.
Berkshire Hathaway investors were left scratching their heads over the state of one of its biggest investments: Kraft Heinz
“I probably know as many rich people as just about anybody. I don’t think they’re happier because they get super rich,” he said. “I think they’re happier when they don’t have to worry about money, but you don’t see a correlation between happiness and money beyond a certain place.”
But Berkshire Hathaway investors were left scratching their heads over the state of one of its biggest investments: Kraft Heinz, created by the merger in 2015 of two of the world's biggest food groups in a deal backed by Buffett and New York investment group, 3G Capital.
In February, the group behind the likes of Heinz Ketchup, Philadelphia cream cheese, Cadbury and Kool-Aid revealed it had taken a $15 billion (€13.4 billion) writedown to reflect a slump in the value of some of its biggest brands, and cut its dividend by a third. The company’s almost 28 per cent slump on the day was compounded by news that it had received a subpoena from the US Securities and Exchange Commission (SEC).
Last Saturday, as Berkshire Hathaway reported first-quarter figures to coincide with its annual shareholder meeting, it left a gap where the contribution from its 27 per cent Kraft Heinz stake should have been – as the food group was behind in publishing its own figures.
Within 48 hours, Kraft Heinz came out with its hands up, saying it will restate financial reports for almost three years, after discovering – following the SEC subpoena – employee misconduct in its procurement division.
While the company said no senior executives were involved, it raises questions about controls in the business and a bonus plan that – in contrast to Buffett’s own long-term value philosophy – relies heavily on meeting short-term targets.
An internal investigation had revealed that several employees in the procurement area had wrongly booked in savings and rebates from suppliers in accounting periods that should have been carried over for a longer period. The practice served to artificially lower the cost of making products.
As Kraft Heinz’s sales declined, the procurement and operations teams were said in recent years to have become a focal point for securing cost savings to boost earnings and help meet targets that would deliver executive bonuses.
The company said on Monday it has “implemented and continues to implement certain remedial actions, including employee personnel actions and certain improvements to its internal controls, to mitigate the likelihood of this occurring in the future”.
The scale of the financial restatements will amount to more than $180 million, it said. But it doesn’t take away from Kraft Heinz’s real problem: that it has been struggling in recent times to keep up with fast-changing consumer tastes, mounting competition among long-standing rivals, and the growing power of emerging brands.
The group, which traces its roots back to Heinz’s foundation 150 years ago, is turning over about $26 billion in annual sales, having spent “billions and billions and billions of dollars” advertising over the years, Buffett noted last Saturday.
By contrast, US warehousing giant Costco’s Kirkland Signature private-label brand (set up a little over a quarter of a century ago) posted $39 billion in sales last year, more than virtually any other food company, he noted. Its revenues grew 11 per cent from 2017.
Elsewhere, Amazon, which has evolved over the past 15 years from selling books and DVDs to become the world's biggest online retail platform, is only getting started in the private-label food and beverage space as the stigma surrounding generic brands continues to evaporate in western markets.
“The retailer and the brands have always struggled as to who gets the upper hand in moving a product to the consumers,” Buffett said. “There’s no question in my mind . . . certain retailers, the retail system has gained some power and particularly in the case of Amazon and Walmart.”
Buffett, who admitted in February to overpaying in backing his previously-owned Heinz’s merger with Kraft four years ago, said in a CNBC interview aired on Monday that “the company has my confidence”.
But he revealed also on Monday that his company has been piling into Amazon in recent months.
Even high-conviction investors, it seems, like to hedge their bets.